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Pension Fitness Stays Firm

Released yesterday, the Pension Fiscal Fitness Monitor indicates that pension plans’ funded status didn’t change much in the second quarter of 2014. The measure is produced by Legal & General Investment Management America, Inc. (LGIMA) on a quarterly basis to help estimate the health of U.S. defined-benefit pension plans. It determines the change in funded status for a model plan that has typical liabilities and an investment strategy which places 60 percent of assets in global equities and 40 percent in global bonds.

For the traditional 60/40 model plan, funded status fell last quarter by less than half a percentage point; it remains just under 90 percent. With Treasury rates declining 22 basis points and credit spreads tightening slightly, overall liabilities for the model plan increased by just over 4 percentage points, while asset values increased 4 percent.

The good news from the report is that companies which have implemented a liability-driven investment strategy saw their funded status improve. The Pension Fiscal Fitness Monitor considers two types of plan de-risking. One involves allocation of 60 percent of assets in equities and 40 percent in fixed-income products. For this model plan, the funded ratio increased just under 1 percentage point in Q2/2014.

The other de-risking model, which LGIMA calls “Level 2 LDI,” looks at the funding ratio of a typical U.S. corporate defined-benefit plan at the beginning of the quarter and builds on that information a custom liability benchmark and derivatives overlay. The Level 2 LDI model plan saw its funded status grow by more than 2 percentage points in the second quarter.

“We estimate that funded status levels for the average corporate defined-benefit plan with a traditional 60/40 allocation were unchanged over the quarter, as strong equity market returns helped to offset lower pension discount rates,” says Don Andrews, head of LDI strategy for LGIMA. “It was a strong quarter for plans that had previously implemented de-risking strategies, as they were largely hedged from the fall in rates.”

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